Tuesday, July 30, 2013

Mediation and the Science of Decision Making Part IX: Think Like A Trader

Last time, we looked at one way to use behavioral economics to help our clients make better decisions in mediation by setting reference points before we begin negotiating.  Today we discuss another way to do better in any negotiation: thinking like a trader.  

Most attorneys have a great deal of experience with negotiation and may even consider themselves to be professional negotiators. (Interestingly, Kahneman and Tversky found that even professionals make the same cognitive errors as the rest of us, but we will put that aside for the moment.) 

Most parties do not have the same level of negotiation experience as their lawyers. And even if they do, the stress of litigation and mediation leaves them less capable of making rational economic decisions. Although there are benefits to long days of mediation, experienced negotiators know that 12 or 14 hours of mediation can reduce one’s ability to think clearly and make good business decisions. Especially at the end of a long day, parties need to understand the impact that cognitive errors have on them.  

Kahneman and Tversky tested ways to help people be less sensitive to these cognitive errors. They found first that professional traders in the financial markets – people who make decisions on gambles for a living – are more tolerant of losses and as a result suffer from fewer cognitive errors when making financial decisions. 

Amazingly, one simple way to help people make better decisions is to tell them to “think like a trader.” Participants in experiments become less risk averse, and their emotional reaction to loss (as measured physiologically) decreases when given this simple advice. In other words, simply asking people to “think like a trader” gives them a better framework for analyzing their choices and helps them make better, more rational decisions.   

A simple yet powerful tool that works well when it's time to close the deal. Next time, another tool for closing deals: Shifting Reference Points And Using The Endowment Effect. 

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